Reasonable Indemnities (Hmmph)

mirkwood evans vincent pen on paper contract indemnities

Indemnities (like industrial strength cleaners) have their place in the world, but (also like industrial strength cleaners), they should not be over-used and they should not be used in the wrong places.

I have lost count over the years of the number of times a client has reviewed a contract before me, and failed to strike through language requiring them to indemnify a customer for all losses incurred as a result of a breach.

An indemnity is a powerful remedy and it is understandable that business customers want to use it in their contracts. The problem with an indemnity (from the supplier’s point of view) is that there is no requirement for the indemnified party to show that their losses were incurred reasonably. They only need to show that those losses were incurred. Suppliers sometimes try to modify the indemnity language, saying that losses incurred under the indemnity must be incurred reasonably and/or that each party has a duty to mitigate its losses…….but I have been at the snarling end of a judge pointing out to me (in relation to contract language not drafted by me, I hasten to add) that such language defeats the whole purpose of an indemnity, and that if the parties intended for there to be an indemnity (which presumably they did because they used the word “indemnify”), then the losses incurred will be presumed to have been reasonably incurred unless the indemnifying party can prove to the judge that they were not reasonably incurred.

In other words, the normal rules about proving damages are turned on their head once you have called up the indemnity genie.

This is a potentially tolerable position to be in if (for example), the indemnifying party (a) owns certain intellectual property rights (“IPR”), (b) knows that their IPR does not infringe any third party rights, (c) indemnifies a customer for damages and costs arising out of claims for third party infringement on condition that they have sole conduct of the defence of the claim, and (d) excludes liability for matters such as (i) late notification of the claim, (ii) unauthorized use of the IPR by the customer, (iii) changes made by the Customer to the IPR, and (iv) use of the IPR in conjunction with something else not provided by the supplier (“other stuff”), where the other stuff (or the conjoined use of the supplier’s IPR with the other stuff) has resulted in the infringement.

In most other circumstances, it is typically not a great idea, and you need to be aware that even if you make the indemnity subject to a contractual cap on liability, your chances of hitting the liability cap are greatly increased vs the standard proven damages route. You may also suffer the mildly alarming prospect of your lawyer’s spine going backwards whilst they foam uncontrollably at the mouth, when you tell them what you have agreed to. Be good to your lawyers, and don’t do this. Lawyers are people too.

Contact if you would like any contracts reviewed before you sign them!!